Reinvestment Rate

AAA

DEFINITION of 'Reinvestment Rate'

The amount of interest that can be earned when money is taken out of one fixed-income investment and put into another. The reinvestment rate is the amount of interest the investor could earn if s/he purchased a new bond, if the same investor is holding a callable bond that is called due because interest rates have declined. If the original bond paid 5% and the new bond pays 3%, the reinvestment rate is 3%.


The possibility of such an interest-rate drop is called "reinvestment rate risk".

BREAKING DOWN 'Reinvestment Rate'

Anticipated reinvestment rates play a role in investors' decisions about what term to select when purchasing a bond or CD. An investor who expects interest rates to rise might select a shorter-term investment, under the assumption that the reinvestment rate when the bond or CD matures will be higher than the interest rates that can be locked into on longer-maturity investments today.

RELATED TERMS
  1. Reinvestment

    Using dividends, interest and capital gains earned in an investment ...
  2. Personal Finance

    All financial decisions and activities of an individual, this ...
  3. Effective Yield

    The yield of a bond, assuming that you reinvest the coupon (interest ...
  4. Annual Percentage Yield - APY

    The effective annual rate of return taking into account the effect ...
  5. Reinvestment Risk

    The risk that future coupons from a bond will not be reinvested ...
  6. Fixed-Income Security

    An investment that provides a return in the form of fixed periodic ...
Related Articles
  1. Bonds & Fixed Income

    Six Biggest Bond Risks

    Don't assume that you can't lose money in this market - you can. Find out how.
  2. Investing Basics

    Callable CDs: Check The Fine Print

    These offer higher returns than regular certificates of deposit, but there's a catch.
  3. Options & Futures

    Callable Bonds: Leading A Double Life

    Find out more about these dangerous and exciting cousins to regular bonds.
  4. Retirement

    Bond Basics Tutorial

    Investing in bonds - What are they, and do they belong in your portfolio?
  5. Retirement

    The Money Market

    If your investments in the stock market are keeping you from sleeping at night, it's time to learn about the safer alternatives in the money market.
  6. Investing

    Five Things to Consider Now for Your 401(k)

    If you can’t stand still, when it comes to checking your 401 (k) balance, focus on these 5 steps to help channel your worries in a more productive manner.
  7. Mutual Funds & ETFs

    ETF Analysis: Guggenheim Enhanced Short Dur

    Find out about the Guggenheim Enhanced Short Duration ETF, and learn detailed information about this fund that focuses on fixed-income securities.
  8. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  9. Mutual Funds & ETFs

    ETF Analysis: SPDR Barclays Short Term Hi Yld Bd

    Find out about the SPDR Barclays Short Term High Yield Bond ETF, and explore detailed analysis of the fund that tracks short-term, high-yield corporate bonds.
  10. Mutual Funds & ETFs

    ETF Analysis: SPDR Barclays Short Term Corp Bd

    Learn about the SPDR Barclays Short-Term Corporate Bond ETF, and explore detailed analysis of the exchange-traded fund tracking U.S. short-term corporate bonds.
RELATED FAQS
  1. What annual return could an investor expect on average from the telecommunications ...

    The telecommunications sector comprises a variety of companies that provide communication services over wireless and cable ... Read Full Answer >>
  2. What are the risks of investing in a bond?

    The most well-known risk in the bond market is interest rate risk - the risk that bond prices will fall as interest rates ... Read Full Answer >>
  3. What are the maximum Social Security disability benefits?

    The maximum Social Security disability benefit amount for a single eligible person in 2015 is $1,165 per month, but you can ... Read Full Answer >>
  4. What is the relationship between the current yield and risk?

    The general relationship between current yield and risk is that they increase in correlation to one another. A higher current ... Read Full Answer >>
  5. What is a 'busted' convertible bond?

    In finance, a convertible bond represents a hybrid security that offers debt and equity features and risks. While a convertible ... Read Full Answer >>
  6. Who or what is backing municipal bonds?

    Municipal bonds are backed by dedicated taxes or revenue sources related to specific projects, or by the full faith and credit ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Dead Cat Bounce

    A temporary recovery from a prolonged decline or bear market, followed by the continuation of the downtrend. A dead cat bounce ...
  2. Bear Market

    A market condition in which the prices of securities are falling, and widespread pessimism causes the negative sentiment ...
  3. Alligator Spread

    An unprofitable spread that occurs as a result of large commissions charged on the transaction, regardless of favorable market ...
  4. Tiger Cub Economies

    The four Southeast Asian economies of Indonesia, Malaysia, the Philippines and Thailand. Tiger cub economy indicates that ...
  5. Gorilla

    A company that dominates an industry without having a complete monopoly. A gorilla firm has large control of the pricing ...
  6. Elephants

    Slang for large institutions that have the funds to make high volumes trades. Due to the large volumes of stock that elephants ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!